European shares fell back on Thursday, tracking a decline in Asian shares, as weakness in Chinese markets eclipsed optimism that a NAFTA deal could be struck by Friday's deadline.

The pan-European STOXX 600 extended early losses to 0.5 per cent by 0830 GMT, while Germany's DAX, which is sensitive to China due to its prominence as a German export market, dropped 0.9 per cent.

China factory activity

Chinese stocks fell after a Reuters poll showed activity in the factory sector likely slowed for the third straight month in August amid uncertainty over an escalating trade war with the United States. In Europe, trade-sensitive mining stocks tumbled 1.3 per cent and autos fell 0.7 per cent.

“It's a balancing act with on the one hand relatively positive momentum behind NAFTA, but when the focus turns to China and trade war it doesn't seem like an end is in sight because any escalation plays to Trump's rhetoric of how he's protecting U.S. prosperity and jobs,” said Gary Waite, portfolio manager at Walker Crips Investment Management.

Earnings reports caused some sharp moves in individual stocks. Shares in Europe's largest property company Unibail-Rodamco-Westfield fell 5 per cent even though the company reported a boost to profits from its acquisition of Australian shopping centre giant Westfield.

Traders said a Morgan Stanley note weighed on the stock after analysts at the US bank downgraded their view on the European property industry to “in-line” from “attractive”.

“For almost every property stock in Europe we expect a lower total return profile compared to what it has been delivering,” Morgan Stanley analysts wrote.

They also said rising inflation and bond yields would increase differentiation in the sector and leverage would become more of a focus.

UK commercial property firm Intu fell 3.6 per cent after Morgan Stanley cut the stock to underweight from equal-weight, and peer Hammerson fell 4.1 per cent. Klepierre lost 3.8 per cent after a Morgan Stanley downgrade.

Real estate was Europe's worst-performing sector, down 1.3 per cent. Shares in Swedish radiation therapy gear maker Elekta fell 6.6 per cent after it reported an unexpected drop in first-quarter operating profit.

Bouygues was a rare gainer, up 3.1 per cent after the French conglomerate stuck to its full year outlook for rising profitability as its telecoms division improved. The prospect of Bouygues Telecom gaining market share sent shares in rival Iliad, a telecoms disrupter offering cut-price contracts, tumbling 6.4 per cent.

Bringing up the rear was Swiss asset manager GAM which sank a further 8.1 per cent, hitting its lowest in more than nine years and taking its year-to-date losses to 51 percent. GAM shares have sold off sharply since the firm suspended a top director and suspended, then liquidated, some bond funds.

Overall in Europe, escalating trade disputes have driven cyclical mining and autos sectors down this year while healthcare and technology take the lead. With the second-quarter earnings season drawing to a close, companies in the MSCI Europe index have delivered 10.9 per cent year-on-year earnings growth in euro terms.

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